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Royal Bank of Scotland (RBS.L) and Lloyds (LLOY.L) extended their recent gains on Friday, with investors sending RBS shares to a two-month peak, while the FTSE 100 advanced ahead of an Italian debt auction.

RBS took on 1.7p, or 7.3%, to 24.7p – its highest level since the end of October – following a 5.5% gain on Thursday after the state-backed lender unveiled cuts to its investment banking division.

Friday’s gains came as broker Seymour Pierce upgraded its recommendation for RBS to ‘buy’ from ‘reduce’, lauding the bank’s new plans.

‘We believe that management has finally “grasped the nettle”, and though not guaranteed to generate rewards for shareholders, we believe there is now greater potential for gains,’ said Bruce Packard, analyst at the broker. ‘RBS remains risky, but at least now shareholders could be rewarded for the risk.’

Italy’s borrowing costs fall

Meanwhile, the UK index of blue-chip shares hardened 0.52%, or 30 points, to 5,693 and the All Share index improved 0.47%, or 14 points, to 2,925. See the FTSE’s performance and the index’s top winners and losers.

Italy, now at the centre of the eurozone debt crisis, is set to sell €4.75 billion of three-, four- and six-year government bonds, following well-received Italian and Spanish auctions in the previous session.

It is speculated that the success of those debt sales may have been due to a flood of cheap three-year loans the European Central Bank handed out last year, according to Michael Hewson at CMC Markets.

But he added: ‘It remains to be seen whether banks and investors will be prepared to do that with longer term paper and that really remains the acid test, as to whether these lower borrowing costs are sustainable.’

Nonetheless, the borrowing costs of Italy, Spain and France – the eurozone’s three biggest economies after Germany – all dropped further of the auctions, with those of Italy nearing a one-month low.

Invensys slumps

Tesco (TSCO.L) topped the loser board on the FTSE 100 for a second day running, shedding another 6p to 318p in the wake of the first profit warning from the supermarket giant in 20 years.

Engineers were among the biggest gainers on the FTSE 100, amid hopes for the global economic recovery. IMI (IMI.L) took on 28p to 887p and Rolls Royce (RR.L) added 10p to 773p, nearing Thursday's all-time high of 780p.

It has very litle to do with what RBS did yesterday. The eurozone looks like they are beginning to get the act toigether as is seen from the decline in yield of sovereign debt. basically institutional investors are terrified of being left behind as the bank stocks look like they have been oversold in an armageddon scenario which is never going to happen.